Benjamin Franklin once said: “In this world nothing can be said to be certain, except death and taxes.” Well, Mr. Franklin clearly wasn’t a parcel shipper — if he was, he surely would have added the yearly General Rates Increase (GRI) to that list of certainties.
Parcel shippers know the term GRI well, mostly because of its impact on their annual parcel spend. The GRI refers to an annual increase of rates that parcel carriers assess to shippers utilizing their services, usually amounting to about a 4.5-6% increase of their parcel spend — or so it might seem at first glance.
What shippers often don’t know is that the announced GRI represents merely an average of different rate increases across different service types. So, for example, the real numbers might include a 6% increase on ground commercial 1-5 lb. packages in zone 4, while a 1-5 lb. package in zone 2 is only a 2% increase. Several other increases are distributed unevenly, then averaged together in order to calculate that year’s GRI.
As you can imagine, these different rate increases impact different shippers in different ways. If a parcel shipper’s shipping profile is primarily comprised of the hypothetical 1-5 lb. zone 4 packages referenced above, the dollar amount attached to that shipper’s rate increase is going to be much more substantial than a shipper who primarily ships the hypothetical 1-5 lb. packages in zone 2.
In other words, carriers typically target their most utilized areas for higher increases — the areas in which they want to improve their margins the most. The result, of course, is that shippers who do not uniformly utilize every shipping category in the way the GRI outlines (AKA, the vast majority of shippers) will experience a higher rate increase than what is reported in the GRI.
Typically, the reported GRI amounts to a 4.5-6% annual increase. This in and of itself is daunting for many parcel shippers, but based on the uneven distribution of rate increases targeted by carriers, many shippers find their parcel spend increased by a percentage in the double digits!
It’s also important for shippers to remember that any standard year-over-year increase based on a percentage of parcel spend will compound with each successive year, resulting in progressively higher increases.
The figure below assumes a flat 6% GRI (often the best case scenario for many shippers affected by uneven distribution) applied over the course of four years for a parcel shipper, with no additional service utilizations each year.
As you can see, the GRI, when compounded over the course of four years, ultimately increases the parcel spend by 26% (as opposed to 24%, as one might expect). And that’s assuming a “best case scenario” rate increase and no additional service utilizations.
Like taxes, the GRI occurs every year (although admittedly, the GRI usually occurs around the start of the new year rather than April). And also like taxes, only the absolute largest shippers with massive parcel spends have any hope of avoiding or side-stepping the GRI.
For most shippers — especially Internet retailers or e-commerce companies that ship primarily residential, large, or heavy packages — the GRI is an unavoidable reality. But it is also a reality that can be managed with proper foresight and preparation. Typically, it cannot be mitigated entirely, but its impacts certainly can be.
The numbers make it clear that shippers must account for the GRI in their yearly planning sessions. Proactively planning for the GRI is the best way to mitigate its impact on a shipper’s overall business. Below, we have isolated three tips for parcel shippers attempting to plan for the GRI:
1. Understand the Shipping Profile: It is critical that shippers understand what service types they use, what weights they ship, what zones they ship to, and what accessorials and surcharges are imposed on their account. All of these factors can be targeted in the annual GRI — and often are. It is only when a parcel shipper understands their unique shipping profile that they can begin to understand how the GRI will impact their business and future shipping behaviors.
2. Optimize the Carrier Agreement: For parcel shippers who have not renegotiated their carrier agreement in several years, but have continued to be assessed new rate increases each year, it is highly unlikely that those agreements are still serving the shipper’s needs. Taking a data-based approach to renegotiating that carrier agreement for mutual accountability between the shipper and the carrier can produce lucrative results; indeed, if that same $100,000 parcel shipper mentioned earlier were to renegotiate their carrier agreement and save even 10%, they would be in a much better position when it comes to a GRI, which compounds the amount of the total spend over multiple years. And for some larger shippers, it is even possible to negotiate a graduated cap in which they may accept, for example, only a 2% rate increase in year 1, a 2.5% increase in year 2, and a 3.5% in year 3.
3. Utilize Predictive Analysis: While carriers do not outright announce and outline the service areas where rates will be increased in the months leading up to the official announcement, they do provide clues through the announcements they release leading up to it. This year, carriers have released some discussing the impact of seasonality; it is reasonable, therefore, to assume there may be increases in seasonal surcharges and accessorials. In that case, parcel shippers can begin to look at what an increase in rates during the holiday season would do to their parcel spend. Utilizing a simulation tool, which applies a GRI to previous years’ shipments, provides insight into the impact of the GRI on your historic shipments, letting you better plan for selecting service types and budgeting appropriately. A shipper may determine that if the cost of their shipping is to rise by 10%, the cost of the good(s) may rise accordingly, the shipping charges customers pay may have to rise, or more cost efficient service types will need to be selected. These sorts of upfront preparations can ultimately help to mitigate the impacts of the GRI.
Parcel shippers have an obligation to understand how annual GRIs will impact their overall parcel spend. Every shipper’s situation will be different based on their unique shipping behaviors and characteristics, but one thing will be the same for all: shippers must not take this number at face value. A 4.5% GRI could represent double digit increases—thousands of dollars—to your shipping costs. It is only through a careful understanding of their shipping profile, a carrier agreement built on a strong foundation of mutual accountability, a data-based approach to predictive modeling, and the proper simulation tools, that shippers can mitigate the impacts of the GRI on their overall business.
When it comes to Benjamin Franklin’s quote about life’s certainties, we were mostly in agreement, with the one notable addition of the GRI. But he also once said that “an investment in knowledge pays the best interest.”
And we have to admit—where the GRI is concerned, we couldn’t agree more.
Andy Brueckner is Vice President, Business Solutions at VeriShip and specializes in developing strategies to optimize parcel carrier agreements. He can be reached at Andrew.Brueckner@veriship.com.
Travis Rhoades is Director of Data Science at VeriShip and is responsible for the creation of valuable information products from VeriShip’s vast data resources. He can be reached at Travis.Rhoades@veriship.com.